Hidden Costs in the Housing Loans
By Madhav Puranik, Chief Manager(Credit), State Bank of India
What are the different purposes for which home loan can be taken?
Home loan is available for following purposes:
i) To purchase or construct a new house/flat
ii) To purchase an existing (old) house/flat
iii) To extend, repair, renovate or alter an existing flat
iv) To purchase a plot of land meant for purpose of construction of a dwelling unit.
What are the main steps involved in the process of taking a housing loan?
There are two stages in the housing loan process
1) Sanction of the loan
2) Disbursement of the loan as per the progress of construction of the property.
What are eligibility conditions for the home loan?
Generally, following conditions must be fulfilled:
i) minimum age of applicant: 21 years
ii) salaried or self-employed with regular income
Who can be the co-applicant for the loan?
Generally, i) All co-owners need to be co-applicants ii) All co-applicants need not be co-owners.
When can I apply for the home loans?
You can apply for the Home Loan even before you have selected your property or before the start of construction. You will get in -principle approval for the loan amount which will help you decide your budget and plan the purchase of house/flat.
Can I get more than one housing loan?
Two housing loans can be given to an individual provided he has the capacity to repay. The loans can be for same property (repairs/extension etc) or for different properties.
How much loan can I get?
The loan amount is based on two criteria: Age and Net Monthly Income (NMI). You can get maximum loan upto 85% of the cost of the property including the cost of land, registration charges etc.(A)
If the loan for repairs, extension etc. of the house, the loan amount will be 80% of the cost of repairs/extension. (A) The loan amount will be 70% for purchase of land for construction of house. (A) However, the loan amount is also linked to the age of applicants.
If you are between 21 and 45 years of age, you will get maximum loan equal to 48 times total of Net Monthly Income (NMI) which is net monthly income after all deductions including statutory deductions like Provident Fund (PF) and Income Tax from Gross Income and other income from all sources.(B)
If your age is above 45 years, you will get maximum loan equal to total 36 times of NMI as above and others income from all sources. The actual loan amount is lesser amount of A & B linked to cost of property and age.
What are the fees payable and when are they payable?
The following are the different types of fees payable:
A) Finance Companies
i) Processing fee: generally 0.8 % of loan amount
ii) Administrative charges: 1.00 % of loan amount
i) Processing fee: normally 0.5 % of loan amount at the time of application.
ii) Search report charges by the Advocate at the time of sanction.
iii) Equitable mortgage charges: for stamp duty payable to the Government at
the time of documentation.
For A & B Property Insurance Charges at the time of disbursement
What are the components of NMI?
The NMI is income from all sources of an salaried individual It Includes: 1) The NMI from the salary of applicant
2) The NMI from the salary of co-applicant/spouse
3) The income from other sources like
a) Rent from the existing/proposed flat
b) Agricultural income
c) Income from tuitions, tailoring etc.
In case of self employed/professional the NMI is Annual Income after deduction of income tax divided by 12 (as per I-T return) plus other income as at 9.3 above.
Over how many years can I pay the loan?
You can repay the loan over a maximum period of 20 years for both Floating Rate Loans and Fixed Rate Loans. The term will not ordinarily extend beyond your age of retirement (if you are employed) or on reaching 65 years of age whichever is earlier. If the applicant’s age is about the retirement age then he may be required to take a suitable (generally single premium) Life Insurance Policy to cover the risk upto the repayment period of loan.
The Bank will help you to determine the repayment period to suit your convenience and financial ability.
What are the advantages of 15 and 20 years terms?
A) 20 years Repayment Period
In the initial years of the loan, more interest is paid off than principal,
meaning larger tax deductions and greater take home salary.
B) 15 year Repayment Period
Here, you pay more principal earlier, meaning lesser tax deduction and
lesser take home salary.
How do I pay an EMI?
The EMIs are paid by means of Post Dated Cheques (PDCs) drawn in favour of the Bank. Generally, after the full disbursement of the loan, 36/48 PDCs of the account, where salary/business income is credited, are required to be given to the lender.
What is pre-EMI interest? How is it calculated?
Pending final disbursement of the Housing Loan, you pay interest on the portion of the loan disbursed. This interest is called pre-EMI interest. It is payable monthly/quarterly upto the date of commencement of EMI.
When the EMI commences for the housing loan?
EMI will commence 1 or 2 months from the month when full disbursement is made or 18 months from the disbursement of first installment of the loan (in case of flat under construction) whichever may be earlier.
Can the EMI be reset during the tenure of the loan?
If there is substantial downward revision in the rate of interest, the facility of downward refixing of EMI can be granted to a housing loan account which is satisfactorily conducted and of certain loan amount is prepaid in one instance, EMI may be refixed downwards. If the EMI is not refixed, then there is decrease in number of installments.
Can I make more payment then EMI?
You can pay extra money (more than your EMI) any amount, anytime ahead of repayment schedule to prepay the loan. But you will get the benefit of such payments more if the Bank/Institution charges interest on daily reducing balance method rather than monthly/yearly reducing balance method and do not charge you for pre-payment.
Can I prepay the loan ahead of repayment schedule?
You may have to pay prepayment charges if you want to close your loan a/c for taking loan from other Bank.
Can the EMI be fixed upwards?
EMI can be fixed upwards at the request of the customer
What is the importance of an amortization schedule?
The reduction of your loan amount by monthly installment is reflected in a tabular form in an amortization schedule. It provides important information by giving the breakup of every EMI towards repayment interest and outstanding principle of your loan for full tenure of the loan.
What will happen if Post Dated Cheque(PDC) given for housing loan repayment of loan is returned unpaid?
If the cheque given to the Bank towards repayment of loan is returned unpaid, then the cheque would be presented for a second time. If it still remains unpaid, the Bank may initiate action under section 138 of Negotiable Instruments Act. Also you have to pay the charges for the cheque returned unpaid.
Why NOC is necessary in case of Home Loan?
No objection certificate (NOC) from development authority/builder/co-operative housing society enables the Bank legally to create the security against which the Bank gives the loan.
What are the different methods of calculation of interest?
If the interest is calculated on a flat basis over the tenure of loan then you are paying a higher rate than that quoted. You should go in for the Bank which charges interest on Daily Reducing Balance (Bal.) Method.
Different methods for calculation of interest:
A) Annual Rest Method or Yearly Reducing Bal. Method :This method accounts for the principal repayments only at the end of financial year. Thus, you pay interest on the principal that you have already returned to the finance company. The effective rate of interest is thus significantly higher than the quoted interest rate because the principal on which the interest is charged goes down every year.
B) Monthly Rest Method: In this method, the principal on which interest is charged goes down every month. This results in more saving than the Annual Rest Method.
C) Daily Rest Method: In this method, the principal on which interest is charged goes down from the day, the amount is credited to loan a/c. This leads to lowest interest burden and maximum savings.
What is an Adjustable/Floating Rate Housing Loan?
A loan where the interest rate is not fixed is referred to either as a floating interest rate loan, variable interest rate loan or adjustable rate loan, It is linked to a specific index or margin eg. Above/below Medium Term Prime Lending rate (MTPLR)
What is Fixed Rate Housing Loan?
It is a loan where the interest rate is fixed during the life of the loan.
What are the advantage of Fixed Rate Housing Loan?
i) The total repayments made during the entire period of loan are predictable as the Equated Monthly Installment(EMI) and interest rate remain the same.
ii) The total housing cost remains unaffected by interest rate changes and inflation.
iii) It helps in financial budgeting/tax planning.
What are the advantages of Floating Interest rate Loan?
i) The Floating Interest Rate is lower initially than are Fixed Interest Rate.
ii) The monthly payments/EMI can be lower
iii) The borrower will qualify for a larger loan amount
In case of failing interest rates, a floating rate loan is a better option but when the interest rates are rising, you may opt for a fixed rate loan.
Can I avail tax concessions on housing loan for purchasing a plot?
The benefit of I-T provisions would be available only if construction on the plot acquired with help of loan is completed within the prescribed period from the date of obtaining the loan.
When is the IT certificate issued?
IT certificate will be issued at the end of financial year. The Bank can issue provisional certificate to enable you to submit to your employer.
What is the security for the Loan?
The mortgage is a legal claim on the house the house or property that secures the promise to pay the debt.
Normally, first mortgage of the property is the security for the loan. Generally, the mortgage by way of deposit of title deeds is taken (equitable mortgage)
Collateral security could be any of the following:
A) Personal guarantee of a suitable individual
B) Assignment to the lender of the insurance policies
C) Other investments acceptable to the lender
When the lender will disburse his share of housing loan?
There are two methods followed by the lender to disburse housing loan
1) The housing loan will not be disbursed in part or in full until the borrower has fully invested his own contribution i.e. the cost to be incurred for the house less the housing loan.
2) The housing loan will be disbursed in proportion to the borrower’s contribution
What is property insurance?
The property must be insured for fire, earthquake and other hazards in the joint names of the lender and the applicant during the tenure of the loan. The lender should be the beneficiary of the policy and the property must be insured for the total value.
What sort of repayment period should I opt for while taking a home loan?
You should consider your long term commitments and responsibilities. It is better to take a practical approach and choose longer tenure and lower EMI. After all, you can always prepay the loan if you find that there are extra funds available after discharging all your liabilities.
What are the legal formalities for the Home Loan?
a) The law in many states requires you to register the agreement for sale between the builder and purchaser. You should lodge the agreement for registration at the office of the Sub-Registrar appointed by the State Government, under the Indian Registration Act, 1908. You have to submit the original copy of the Agreement of Sale duly registered alongwith the Registration Receipt/Index II to the Bank/Finance agency at the time of application for loan.
b) You have to create registered/equitable mortgage by depositing title deeds of the property at a place notified by the Central Government.
What is the procedure followed at the sub-registrar’s office for registration of the Agreement of sale?
First find out the sub-registrar’s office, under whose jurisdiction the property falls. Then go to the respective sub-registrar’s office with one original ‘Sale Document’ and one xerox copy. You have to affix photographs of all the sellers on the document.
Sub-registrar will take thumb impression of all sellers & purchasers to prevent benami transactions. All documents relating to the property which are to be registered should accompany the property card.
What is the purpose of the certificate from the Govt. approved engineer in case of the loan for purchase of an old house?
The Govt. approved engineer
Hidden Costs in the Housing Loans